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S-Cool Revision Summary

S-Cool Revision Summary

Aggregate demand

This is the aggregate of all the demand in the economy. It includes consumption by households, investment by firms, government spending and consumption by foreigners on exports. Consumption by UK households on foreign imports must be subtracted because it is included in the measure called 'consumption by households'. An aggregate demand curve shows the total demand in the whole economy at any given price level.

Aggregate supply

This is the aggregate of all the supply in the economy. Effectively, it is the sum of all the industry supply curves in an economy. An aggregate supply curve shows the amount supplied (or the level of real output) in the whole economy at any given price.

Autonomous consumption

This is consumption that is not dependent on income. Most people will spend more as their income rises. But even if income is zero, there will still be some consumption, perhaps using past savings (for a rainy day?). This is autonomous consumption.

Circular flow of income

This is a diagram that shows all the resources, goods and services and money flowing around the economy. In equilibrium, any injections into the circular flow are matched by leakages out of the circular flow.

Classial economist

Classical economists are, more or less, all economists before Keynes. They believed that all markets worked according to the rules of supply and demand. They believed in supply side polices to improve the productive potential of the economy. They did not approve of government intervention in terms of demand management. This would distort the free workings of the far more efficient markets. The term 'neo-classical economists' is used for modern economists who believe in, and revived, the theories used by the old classical economists.

Deflationary gap

A term used with 45 degree diagrams to illustrate the gap between the level of aggregate demand that gives full employment and a smaller level of aggregate demand that is, therefore, deflationary.

Depression

This is a very severe recession. Growth rates are low or negative and unemployment is high for a number of years. This happened to the USA and the UK in the 1930s.

Deregulation

This is a type of privatisation. It is the removal of legal barriers to entry in a previously protected market to allow private enterprise to compete. The bus industry is a good example, as is the banking sector, where building societies and banks have all been competing together for the last decade.

Direct tax

A direct tax is one that is levied directly on income. So, for individual workers, this is income tax. For businesses this is corporation tax.

Dissaving

When one's income is low, one might find that one's spending (or consumption) is higher that one's income. In this situation, one is dissaving. Saving is, in a sense, negative. You could picture this as dipping into past savings, or even borrowing from a third party.

Exogenous

This means 'determined outside the model/theory' Government spending is often assumed to be 'exogenous' in theories of real national income. Whereas, for example, consumption depends on income, government spending is determined by politics, on the whole.

Factors of production

The four factors of production are land, labour, capital and entrepreneurship. They are the inputs into the production process.

Income, output and expenditure methods of measuring National Income

These are the three methods that can be used to measure the size of an economy. A statistician can use any of the three because, in theory, they should all give the same answer. The circular flow of income diagram shows us that income must equal expenditure, because whatever income the households earn from the sale of the factors of production they spend. Output must equal expenditure because what is bought must equal the money that is spent.

Indirect tax

An indirect tax is one that is levied indirectly. One only pays VAT, for example, if one actually buys the good on which it is levied. To a certain extent, there is a choice.

Inflationary gap

A term used with 45-degree diagrams to illustrate the gap between the level of aggregate demand that gives full employment and a larger level of aggregate demand that is inflationary.

Injections

These represent money that enters the circular flow of income. Investment, government spending and exports are all injections.

Keynesian economist

A follower of the economics devised by John Maynard Keynes. Briefly, Keynesian economists believe that the market is not always the answer. They work in perfect conditions, but things are not always perfect. In particular, at the time of the depression in the 1930s, Keynes believed that markets were not working. He felt that there was insufficient demand in the economy and it was up to the government to increase demand through government spending and lowering taxes. Keynesians believe in demand management, whereas classical (and monetarist) economists do not believe in this sort of government intervention.

Leakages

These represent money that leaves the circular flow of income. Savings, taxes and imports are all leakages.

Long run aggregate supply curve

An aggregate supply curve shows the level of real output, or real national income, for the whole economy at any given price level. In the long run, the aggregate supply curve is thought to be vertical if one believes in classical (or monetarist) economics. All markets are in equilibrium and fully efficient, so any increase in aggregate demand will simply raise the price level. Keynesians believe that the long run aggregate supply curve can be horizontal at low levels of real national income (when excess capacity is high). In this situation, aggregate demand can shift to the right without necessarily raising the price level.

Macroeconomics

Macroeconomics is concerned with issues, objectives and policies that affect the whole economy. All economic analysis that refers to aggregates is macro. The UK unemployment rate, the UK inflation rate, the rate of economic growth in the UK; these are all UK aggregates and therefore macro issues.

Marginal propensity to consume

This measures the amount of every extra £1 earned that is spent. For example, a worker might be earning £200 a week. If he gets a £10 a week pay rise, and spends £6 of that £10, then his marginal propensity to consume is 0.6.

Marginal propensity to import

This measures the amount of every extra £1 earned that is spent on imports. For example, a worker might be earning £200 a week. If he gets a £10 a week pay rise, and spends £6 of that £10, but £2 of that £6 was spent on imported items, then his marginal propensity to import is 0.2. This figure is usually quoted in aggregate. For example, the marginal propensity to import of the UK is around 0.3.

Marginal propensity to save

This measures the amount of every extra £1 earned that is saved. For example, a worker might be earning £200 a week. If he gets a £10 a week pay rise, and spends £6 of that £10, then, by definition, he will save the other £4, so his marginal propensity to save is 0.4.

Marginal propensity to tax

This measures the amount of every extra £1 earned that is taxed. For example, a worker might be earning £200 a week. If he gets a £10 a week pay rise, and £3 of that £10 goes in tax, then the marginal propensity to tax is 0.3.

Marginal propensity to withdraw

This measures the amount of every extra £1 earned that is withdrawn. In other words, how much of that £1 is taxed, and then how much of what is left is saved, and then how much of what is finally left (which is consumed) will be spent on imports. If 40p is taxed, 10p is saved and 30p is spent on imports, then the marginal propensity to withdraw will be 0.8.

Monetarist economist

Monetarist economists are, basically, neo-classical economists. The reason for the name 'monetarist' is there strong belief in the growth of an economy's money supply being the main determinant of the economy's price level. Of course, they believe in the power of the market and supply side policies as well, and they do not like government intervention unless it is absolutely necessary (as with the classical economists).

Monetary Policy Committee

Four days after the election of the Labour government in May 1997, the Chancellor, Gordon Brown, announced that decisions on whether interest rates should change would be transferred to the independent Monetary Policy Committee (MPC) of the Bank of England. The nine members of the committee meet once a month and announce their decision at midday on the first Thursday of each month.

Multiplier

Imagine there is a new injection into the economy, a German company investing money (£100 million, say) and setting up a car factory in the UK, for example. This will not be the only affect on real national income. The builders who build the factory will take their wages and spend it elsewhere, at Sainsbury's, for example. Mr. Sainsbury will use this money to pay his workers, and they may spend some of this money down the pub. And so on. The initial £100 million gets multiplied into a larger final increase in real national income. The multiplier is the number by which you multiply the initial injection to get the final increase in real national income.

Nominal income

This is the income that one actually receives. If you get paid £200 a week, then your nominal income is £200 a week. The word 'nominal' is often used in conjunction with 'real'. If you get a pay rise next year so that you are paid £220 a week (a 10% rise) then your nominal income will rise by 10%. But if the price level rises by 8% in that year, then the real rise will only be 2%.

Occupational mobility

This refers to the ability of workers to be mobile in terms of changing jobs. Occupational mobility will improve if a government invests money into retraining, especially for those workers who lost their job in one of the declining industries (whose skills are now redundant).

Privatisation

This is the transfer of assets of economic activity from the public to the private sector. Denationalisation is the form that most people understand (e.g. selling off gas or electricity), but it can include deregulation (the removal of legal barriers to entry in a previously protected market to allow private enterprise to compete) or franchising (where the government allows a private firm to run a previously state run activity for a given period of time).

Production possibility frontier

This is a curve that tends to be convex to the origin and shows all the possible combinations of two mutually exclusive groups of goods (military and non-military goods, for example) where all the economy's resources are being used and in the most efficient way possible. It is important that both of those conditions are fulfilled for an economy to be in a situation on rather than within its PPF.

Productivity

Productivity is the output per unit of input. Usually, labour is the input in question, so it is labour productivity that we are dealing with. This is output per unit of labour. Sometimes it is measured in terms of output per man-hour. Productivity can also be measured in terms of factor inputs or capital.

Real income

Real income refers to what one's income can actually buy, allowing for raises in the general price level. If one's income rises by 10% in a given year, but the average price level has risen by 10% as well, then you can't actually buy any more with this increase in nominal income - your real income has remained unchanged.

Recession

Officially, this is defined as an economy that experiences two consecutive quarters of negative growth in real GDP. Basically, the economy is not doing well. Unemployment probably rises. Recessions tend not to last too long. Very long recessions become depressions.

Savings ratio

This is the ratio of savings to personal disposable income. This is traditionally quite low in the UK, especially in times of economic strength. The recent strength of the economy has seen the savings ratio drop below 10%, as it did in the mid to late 80s.

Short run aggregate supply curve

An aggregate supply curve shows the level of real output, or real national income, for the whole economy at any given price level. In the short run, the aggregate supply curve is upward sloping, as are the supply curves for all industries and firms in the economy.

Subsidies

These are payments made by the government to various firms to encourage them to set up in areas of high unemployment, or to continue producing essential goods. Farmers are given subsidies because they make important goods. A subsidy will shift a firm's supply curve to the right.

Supply side policies

These are government policies that improve the supply side of the economy. This means that the productive potential of the economy improves. The economy can make more at any given price level. Another way of looking at it is that the production possibility frontier shifts outwards (away from the origin). Examples include privatisation in the goods market (which increases competition, efficiency and, therefore, productivity) and education in the labour market (again, this improves the productivity of the workforce).

Supply side shocks

Put simply, this is a shock that occurs on the supply side! A good example is the oil 'shocks' of the 70s and 80s. Oil prices quadrupled in the mid 70s, causing quite a shock to firms who used oil in their production process. Their costs rose dramatically, which affected the amount that they could supply.

Tax burden

This is the burden of taxation on the economy. It is normally expressed as a percentage of GDP. For example, the tax burden in the UK for the tax year 1999-2000 was around 37%. This meant that 37% of real national income was taxed by the government. Income tax is probably the main source, but there are business taxes, duties and VAT as well.

Trade union

A trade union is an organisation of workers who get together because they find that they are more powerful collectively than as individuals. The main goals of a trade union are improving the working conditions of their members and negotiating above inflation wage rises with the employer.

Variable rate mortgage

A mortgage is a very large loan taken out to buy a house. The majority of the money that is paid back to the bank or building society every month is interest. It is very significant, therefore, to choose the right type of mortgage. A variable rate mortgage is one where the monthly payments change as the mortgage interest rate changes (which is normally dependent on the rate set my the Monetary Policy Committee). One can get fixed rate mortgages, where the rate is fixed for a period of time.

Withdrawals

See leakages. This is another word for the leakages from the circular flow of income.

World Trade Organisation (WTO)

The General Agreement on Tariffs and Trade (GATT) was formed at Bretton Woods (a small town in the USA) in 1948. Its aim was free trade throughout the world (free from import controls, that is). Tariffs averaged 50% just after the war. By the time that the GATT became the WTO in 1993, tariffs averaged 5% around the world. Whereas GATT was a series of long meetings between countries called 'rounds', the WTO is an on-going organisation to which countries can complain if they feel another country is obstructing the sale of their exports in an unfair way. See the topic called 'Why trade?' to see why free trade is a good thing.